Activision, EA, Take-Two Cheer Street with Pipeline of Games at E3

By Tiernan Ray

The Street today has been filing to clients its dispatches from the E3 annual video game extravaganza in Los Angeles, where Activision-Blizzard (ATVI) Electronic Arts (EA), Take-Two Interactive Software (TTWO), and other titans give a roadmap for what they’ll publish in months to come.

MKM Partners’ Eric Handler reiterates Buy ratings on Activision and Take-Two, writing that the pipeline is “strong” for new games.

He likes the fact it is still early in the video game console selling cycle for Microsoft‘s (MSFT) XboxOne and Sony‘s (SNE) PlayStation 4: “While this fall/holiday season will see a number of key releases ,the industry is still likely another 12-months away from reaching its sweet spot from an installed-base perspective, and as a result the launch of many more major franchise releases.”

“As such, we believe the outlook for the publicly traded publishers over the next couple of years remains positive.”

Handler prefers both Activision and Take-Two over EA, whose shares he rates a Hold.

Edward Williams with BMO Capital reiterates Outpeform ratings on Activision and EA. Activitision got a good reception for its titles at E3:

We believe Activision’s products are resonating well with the audience in LA this week as anticipation continues to build for new games, particularly Call of Duty: Advanced Warfare, and the new franchise, Destiny. Following an extended product development cycle, we believe the company’s new franchise could be well received by the market and provide a recurring source of revenues through frequent game launches and recurring digital revenues.

EA has dominant share on the new consoles and a strong start with some developing franchises, he writes:

EA’s continued focus on cost control and game quality should provide a strong backdrop to FY2015 and, to a greater extent, FY2016 expected results. We believe the upcoming Battlefield Hardline game has been well received at E3 as the company begins the challenging task of launching a major franchise annually. Looking beyond holiday 2014, we believe that CY2015 is shaping up to be a strong period for the company, in part anchored by the launch of Star Wars Battlefront [...] With a strong start and leading share on next-generation consoles from Microsoft and Sony, we believe Electronic Arts is well positioned for a period of sustained growth with an impressive slate of core titles, strong digital growth, and focus on cost control. We also believe the company continues to leverage its portfolio of key brands and evolving business models across multiple platforms to reach and monetize a broader audience.

Williams has a Market Peform rating on Take-Two, lauding the company’s success but also wishing for more details about when it will publish which new titles:

The company’s recent key titles have been major successes. Digital revenues grew 65% y/y in FY2014, led by the Grand Theft Auto series – GTA Online was the largest contributor to digital revenues in the year. Additionally, NBA 2K Online is the No.1 PC online sports game in China with 19 million registered users. We expect both properties to further expand the company’s digital revenues and operating margins. Take-Two continues to focus on AAA titles as well as an expanding percentage of digitally distributed revenues. With a robust back catalog of games, a growing contribution from higher-margin digital sales, several key partnerships expanding its properties into Asia, a pipeline of at least 10 titles for next-gen consoles, and a significant cash balance, we expect Take-Two to sustain profitability for the foreseeable future. That said, we would prefer to have increased visibility into the company’s release slate before getting more constructive with the stock.

Jefferies & Co.’s Brian Pitz writes that the show met his optimistic expectations, writing that “with dozens of drool-worthy games announced at E3, we think the core gamer finally has a real reason to upgrade to a next-gen platform. This should benefit the entire group — including the software publishers — heading into 2015.”

Pitz, who rates Activision a Buy, thinks they had a “big” show:

Call of Duty Advanced Warfare was the #1 game shown at the Xbox press event and Destiny was the #1 game shown at the PlayStation press event. This is the first time ever one publisher has received top billing at both pressers. Call of Duty looks good and features near-future weapons and perks like jetpacks. We played Destiny’s multiplayer on PS4 and we were impressed. The game feels highly detailed and the gameplay was reminiscent of Halo. Kids-game Skylanders looks to have the best gameplay ever, but this year the game will compete against Disney’s Avengers themed Infinity. Activision didn’t hold a press conference but attendance was heavy at the booth.

He rates EA shares hold, but notes the “Hardline” game titles “could be bigger than originally thought”:

The Hardline trailer looked good and we played the multiplayer, which played like a traditional Battlefield game. EA’s guidance assumes the game could sell 1/3 to 1/2 as many units as last year’s BF4, which sold ~14-15MM units LTD. If Hardline is a success, expect EA to annualize Battlefield. Demand for the Hardline PS4 exclusive beta was so strong that Sony’s network crashed. EA’s Star Wars Battlefront received huge applause at its press conference, and EA is definitely working on additional AAA Star Wars titles. A Star Wars RPG (role playing game) would make a lot of sense. In 2003, Bioware released its classic Star Wars RPG Knights of the Old Republic, which won numerous game of the year awards.

Take-Two’s announcement of further “Grand Theft Auto” development was a positive surprise, though he rates the stock a Hold:

While we knew Rockstar was working on something (suspected it may have been next-gen GTA5), we did not expect any announcements at E3. Interestingly, users who already own the game on PS3 or Xbox 360 can maintain their saved-game data if they buy the PS4 version. We also note Evolve is shaping up as a game to watch. Its trailer received huge applause at the Xbox press event, the booth was packed with gamers looking for hands-on time. The game is only coming to next-gen platforms (could limit sales), but the unique four soldiers vs. one monster multiplayer gameplay is definitely turning heads.

The stocks aren’t reflecting all that enthusiasm, however: EA shares are down 34 cents, or 1%, at $35.36; Actvision stock is unchanged at $21.45; and Take-Two is off 24 cents, or 1.2%, at $20.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.